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First of all, like I said, I'm not an expert on MFs. So, when you use terms
like FidoMFs and ART (do you mean ATR?), I don't know what they are (are these
dog mutual funds?). :-)) Second, since MFs don't have OHLC data,
only NAV closing prices, how do you calculate an ATR? I can see using stdev of
C's, but ATR? Nonetheless, I'd let Amibroker decide which length to use by
simply optimizing on periods.
As for your second question, I see absolutely nothing wrong at all with
selecting nearby support and resistance levels to establish your stops. Lots of
people do this. If by 3*ART, you mean 3*ATR, that, of course, is dependent on
your system. Does your system dictate using 3ATRs as your stop point? Again, the
larger your stop is, the more room you give your security to move in. However,
the downside of that is that you buy less, so your profit potential is
proportionately less. Last year, Tharp tried an experiment using a 25% stoploss
on stocks! Yes, that's not a typo. If you buy a $100 stock, the stoploss is set
at $75. Lots of room for error there. The 25% stoploss equated to 1% risk (which
he terms 1R, R being risk multiple) using the same calculation as I gave before.
But in order for you to profit by 1R, the stock has to move to $125/share. That
could take a long time. But nonetheless, it's just another example of multitudes
that can be used to manage risk. Sorry for the rambling, but I hope some of this
makes sense.
AV
----- Original Message -----
<BLOCKQUOTE
>
<DIV
>From:
Ken Close
To: <A title=amibroker@xxxxxxxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Monday, December 01, 2003 8:29
PM
Subject: RE: [amibroker] Mutual Fund
Money Management
<SPAN
>Al, in the last few
minutes, I created an explore for my FidoMFs with 65day ATRs and SDs, and 252
day ATRs and SDs. I am not sure which if any of these to use. What
length would you pick?? While many (most) MF entries this year
have been almost buy and hold, that is not necessarily the case in the
future. While I do not and will not trade MFs like stocks (and the early
redemption penalties are seeing that it is expensive to do so), it is not
clear which length of ART is suitable. It is also not clear whether SD
plays any part here.
<SPAN
>
<SPAN
>Further, would you
agree that 3*ART (of whatever length) is one way to establish a potential stop
and thus be able to calculate money at risk and hence positionsize.
However, an oft used technique with the less volatile funds is to eyeball a
nearby support level as a stop point, and do the calculation from there.
Do you see anything “wrong” with this approach and would you also look and see
how many ATRs the support level is away from the entry
price?
<SPAN
>
<SPAN
>Ken
<SPAN
>
<SPAN
>-----Original
Message-----From: Al Venosa
[mailto:advenosa@xxxxxxxxxxxx] <SPAN
>Sent: Monday, December 01, 2003 8:19
PMTo:
amibroker@xxxxxxxxxxxxxxx<SPAN
>Subject: Re: [amibroker] Mutual Fund
Money Management
<SPAN
>
<SPAN
>Yes, I agree. I'm not a mutual fund guru by any
stretch of the imagination. Don't know that much about them. But your insight
about MFs holding vastly similar stocks is dead on wrt similar volatilities
and price action. Better to diversify into totally different MFs with
different objectives (large cap, small cap, value, growth, etc.) to fill out
your capital needs. My example simply picked 3 MFs with similar volatiliites.
However, if another fund you wanted to trade had a much higher volatility,
you'd buy less of it to preclude the price movement from getting you out too
soon. And, of course, the corollary is buying a lower volatility MF would
require you to plunk down more capital to risk your 1% (or whatever) because
of its lower price movement. So, depending on the volatilities, you could wind
up buying more than 3 or less than 3 MFs.
<BLOCKQUOTE
>
<SPAN
>----- Original Message -----
<FONT face=Arial
size=2><SPAN
>From:<FONT
face=Arial size=2> <A
title=closeks@xxxxxxxx href="">Ken Close
<SPAN
>To:<FONT
face=Arial size=2> <A
title=amibroker@xxxxxxxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
<SPAN
>Sent:<FONT
face=Arial size=2> Monday,
December 01, 2003 8:06 PM
<SPAN
>Subject:<FONT
face=Arial size=2> RE:
[amibroker] Mutual Fund Money Management
<SPAN
>
<SPAN
>Al: thanks; I was
counting on hearing from you on this—almost sent you a private message but
hoped I would hear from others trading funds and willing to share their
perspective on this issue vis a vis MFs.
<SPAN
>
<SPAN
>One thing I have to
give some more thought to is the “overlapping” that might occur with mutual
fund holdings and what the “combined” volatility of several highly
correlated mutual funds might be. Don’t you agree that if the three
MFs are holding many of the same stocks, that their volatilities are not
“independent”. (Not sure that is the proper word….) It seems then one
would be buying one “larger” equivalent fund rather than three more or less
uncorrelated funds. Seems riskier. Feels
riskier.
<SPAN
>
<SPAN
>More on this
later.
<SPAN
>
<SPAN
>Ken
<SPAN
>
<SPAN
>-----Original
Message-----From: Al
Venosa [mailto:advenosa@xxxxxxxxxxxx] <SPAN
>Sent: Monday, December 01, 2003 7:54
PMTo:
amibroker@xxxxxxxxxxxxxxx<SPAN
>Subject: Re: [amibroker] Mutual Fund
Money Management
<SPAN
>
<SPAN
>Well, Ken, I'm not experienced, but I can take
a shot at your question (remember, the only dumb question is the one not
asked). The principles of money management (MM) are the same regardless of
whether or not you are trading stocks, futures, real estate, mutual funds,
or snails. Risk is defined as the amount of money in a particular trade that
you are willing to lose on that trade. It's not the amount of money you
invest in that trade. Suppose your risk tolerance is 3%: that's how much you
are willing to lose on a trade if you are wrong about the direction of the
price action. If a particular MF's volatility over the last, say, 20 days
is, say, also 3% and it's NAV is 25, then if you bought it at 25, you would
sell out for a loss of 3% if the price declined by 75 cents (3% of 25). How
many shares and therefore how much would you invest to risk that 3%?
Assuming your capital is $50,000, your risk is 3% of 50,000 or $1500. Divide
1500 by 0.75 = 2000 shares. So, you would invest your entire capital on one
MF if you risked 3% (2000 shares * $25/share). That's why the experts say 3%
risk is next to gunslinging. Using a more rational 1% risk model, your risk
is now $500. Dividing 500 by 0.75, you get 667 shares or $16,667 invested in
the MF. You can now afford to buy more mutual funds in order to
diversify. The number of funds to own at a particular time will be
determined by the volatilities of the MFs you are buying. If you used the
example above at 1% risk, you could buy 2 more MFs at the same
price/volatility relationship. Your total portfolio heat would be 3% (1% per
MF), which is fairly low. but unfortunately all your capital has been used
up in the purchase of the 3 MFs. If your starting equity were $1 million
rather than $50 K, then you would risk $10 K per MF for 1% risk. Your
proportionate amount invested in each mutual fund would still be about a
third of your equity ($333,333 per MF, assuming each MF had a 3%
volatility). So, with this volatility, you would still only buy 3 MFs. These
relationships are percentage-based, so it makes no difference how much
equity you have to start with. It all works out the same way. If it
were me, I'd go with 3 funds rather than 1 fund at 100% allocation. I hope
this at least partially answers your question.
<SPAN
>
<SPAN
>Al Venosa
<BLOCKQUOTE
>
<SPAN
>----- Original Message -----
<FONT face=Arial
size=2><SPAN
>From:<FONT
face=Arial size=2> <A
title=closeks@xxxxxxxx href="">Ken Close
<SPAN
>To:<FONT
face=Arial size=2> <A
title=amibroker@xxxxxxxxxxxxxxx
href="">AmiBroker List
<SPAN
>Sent:<FONT
face=Arial size=2>
<SPAN
>Monday, December 01,
2003<SPAN
> <FONT
face=Arial size=2>5:07
PM
<SPAN
>Subject:<FONT
face=Arial size=2>
[amibroker] Mutual Fund Money Management
<SPAN
>
<FONT
face="Courier New" size=2>Excuse me for
asking a potentially dumb question, but what are
some<SPAN
><FONT
face="Courier New">"accepted" rules of thumb for money management AFA
mutual funds are<FONT
face="Courier New">concerned.<FONT
face="Courier New">I can see that you might risk say 2%, on a position,
and know what yourstop loss
would be, and then divide the price per share of the fund
bythe loss level to
approximate the number of shares to buy.<FONT
face="Courier New">But what about some of the other rules of thumb, like
do not risk morethan 3% of
total equity on a position. Or does this apply to the
stoploss? Seems like 3%
might be a small (too small?) amount for a mutual<FONT
face="Courier New">fund position. I do not know. It depends on the
size of your portfolioof
course. What if you have a $20,000 portfolio? What if you have
a$2,000,000 portfolio.
A $60,000 MF purchase out of a $2M portfolio does<FONT
face="Courier New">not "seem" to be the right "proportion", or is
it?Also, what about the
inherent volatility reduction that occurs with
themultiple stocks in a
fund?What about the
number of funds to own at a single time? How would
yougo about figuring this
out, given high correlation among the funds?<FONT
face="Courier New">....or given low correlation among the
funds?Is it better to
divide a given amount (say $100K) among two
similarfunds ($50K each) ,or
is it better to plunk the entire amount into the<FONT
face="Courier New">one fund? Would you increase the number of different
funds givenincreasing size of
total portfolio funds?<FONT
face="Courier New">Again, maybe a whole series of dumb questions but what
do some of youmore
experienced money management folks have to say for this?
<FONT
face="Courier New">Thanks,<FONT
face="Courier New">Ken
<SPAN
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